West Coast Ports Focus on Scale and Efficiency

The likely emergence of the P3 Network in the second quarter of 2014 will drive the strategic plans of West Coast ports in 2014 and beyond.

West Coast Ports Focus on Scale and Efficiency

The likely emergence of the P3 Network in the second quarter of 2014 will drive the strategic plans of West Coast ports in 2014 and beyond.

The alliance of the world’s three largest carriers — Maersk Line, Mediterranean Shipping and CMA CGM — will be a game-changer in terms of competition among container lines for market share, but for ports, the P3 and other mega-alliances have a different meaning.

The P3, which won approval from the Federal Maritime Commission this month but is awaiting the regulatory green light in Europe and China, is forcing West Coast ports into a race against time to develop larger marine terminals and to make these mega-terminals more productive so they will efficiently turn the large vessels carriers are deploying in the major east-west trades.

When it comes to mega-ships, the P3 will have no equal. Lars Jensen, CEO of SeaIntel Maritime Intelligence, notes the P3 will have an average vessel size of 13,000 20-foot container units on the east-west trade routes. “No one can compete with that,” he told the JOC’s TPM Conference in Long Beach last month.

At the same time, the other two large global alliances, the G6 and the CKYHE, will have average vessel capacities of about 11,000 TEUs, Jensen said.

Carriers deploy their newest and largest vessels in the Asia-Europe trade, where the economies of scale are best utilized. For the foreseeable future, most of the vessels exceeding 10,000 TEUs will be deployed in the Asia-Europe trade.

As those vessels are introduced, however, they will displace dozens of 8,000- to 10,000-TEU vessels, many of which will enter service in the trans-Pacific.

Global carriers from 2014 through 2017 are scheduled to take delivery of 154 vessels with capacities of 10,000 to 18,600 TEUs, according to research analyst and consulting firm Alphaliner. Those ships could displace approximately 80 vessels of 8,000 to 10,000 TEUs.

For West Coast ports to compete for business, they must be “big-ship ready,” and that term has many meanings.

The price of entry into the big-ship game, of course, is deep water. On that score, the major gateways of Los Angeles-Long Beach, Oakland and Seattle-Tacoma are fine. They all have access channels that are 50 feet or deeper.

Big ships also need big marine terminals to store and process the thousands of containers generated during each vessel call. Los Angeles-Long Beach, with most of its container terminals ranging in size from 250 to more than 400 acres, is the leader in the U.S. in terms of throughput capacity. The Southern California port complex handles about 15 million TEUs a year.

Now Oakland and Seattle-Tacoma are expanding their terminals. Oakland in recent years has been combining older, smaller facilities into large, modern terminals. Last summer, SSA Marine combined the adjacent facilities formerly operated by APL and Total Terminals International with its own terminal to form a 350-acre facility that is better suited for the 8,000-TEU and larger vessels calling at Oakland.

West Coast ports are landlord ports. They build the terminals and lease them out to operators, so the development of larger terminals requires involvement by the private sector. In Oakland, APL and TTI, an affiliate of Hanjin Shipping, bowed out of terminal operations in Northern California because they weren’t making money in this era of big ships and big terminals.

This is, in fact, a trend throughout the U.S. terminal operating industry. Carrier-operated terminals are finding it increasingly difficult to generate the cargo volume and economies of scale that multi-user terminal operators such as SSA enjoy.

Carrier-owned container terminals were developed on the West Coast in the 1990s and early 2000s as ocean carriers sought greater control of the supply chain. Carriers marketed their ownership of the vessels, terminals, containers and chassis as a competitive advantage.

As most of the carriers moved in that direction, the competitive advantage of owning these assets diminished, said Paul Bingham, economics practice leader at Wilbur Smith Associates. This is especially true as the liner business becomes more commoditized and carriers compete with each other on port-to-port rates, he said.

Building and operating modern container terminals also is capital-intensive, said Knud Stubkjaer, chief strategic officer of Carrix, SSA Marine’s parent company. The modern container terminal requires bigger cranes, stronger wharves, a huge investment in technology and excellent road and rail connectors.

Terminal operators that can’t afford to finance the large civil engineering costs associated with this infrastructure development won’t be able to compete with the full-service providers with deep pockets that are steadily expanding their market share in the terminal operating business, Stubkjaer said.

Until now, the ports of Seattle and Tacoma, separated by only 30 miles, have competed with each other to attract business through carrier-operated terminals. This model could be changing. Seattle and Tacoma applied to the Federal Maritime Commission for permission to form a discussion arrangement, and approval was granted this month. Although it’s uncertain where the talks are headed, the ports said in their FMC filing that they must prepare for the rapidly changing container shipping environment.

“The changing patterns of trade are impacting ports and terminals across the globe. Shipping lines are consolidating into a handful of alliances and investing in larger vessels to reduce costs, which also results in fewer port calls,” the ports stated.

Jack Michael Craig, senior vice president of terminal operations and support for the Americas at APM Terminals, echoed this sentiment. Seattle-Tacoma is one of the port ranges in the U.S. that “would benefit from a structural change,” he said.

The economic savings inherent in large vessels are so compelling that carriers will continue to order big ships. Compared to the previous generation 4,800-TEU vessels, an 8,000-TEU ship has a 47 percent lower cost per slot, and a 14,000-TEU vessel has a 60 percent lower slot cost, John Wheeler, vice president of carrier sales at the South Carolina Ports Authority, told the TPM Conference.

Carriers in recent years have deployed the largest vessels in their North American services in Los Angeles-Long Beach, and it appears they’re marketing and pricing these services aggressively to benefit from the lower slot costs. This is causing a shift in market share on the West Coast.

According to data published on the Pacific Maritime Association’s website, container volume increased 2.7 percent at Los Angeles-Long Beach in 2013 compared to 2012. Oakland’s volume increased 2 percent, but the container volume in Seattle-Tacoma declined 2.2 percent. The year-over-year decline in Seattle-Tacoma continued through February 2014.

Prince Rupert, British Columbia, where some two-thirds of the container volume is destined for the U.S. market, experienced a 5 percent decline in container traffic in 2013. Prince Rupert had been experiencing strong double-digit growth since its container terminal opened in 2007. Prince Rupert’s volume through February is down 14.7 percent compared to 2013.

For carriers, the deployment of large, efficient vessels is a matter of survival. Carriers have lost billions of dollars in four of the last five years because of their inability to increase freight rates to a compensatory level. They therefore must concentrate on what they can control, which is their costs. “It is all about unit costs,” Jensen said.